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Top Startup Incubators And Accelerators: Y Combinator Tops With $7.8 Billion In Value

Incubators have become an increasingly important part of the tech startup scene in recent years.

A number of hot startups have emerged from these programs, encouraging more new entrepreneurs to apply. They’ve become so popular that about one accelerator a day launches these days, says David Cohen, head of TechStars. Not only are they popping up in many cities, but also in specific verticals, such as education. These incubators have been called alternatives to MBAs. Emphasizing that concept, Y Combinator now even accepts applicants who don’t even have a startup idea.

These programs provide new entrepreneurs with mentorship, advice and practical training on technical, business and fundraising topics to help them get from idea to product to launch and beyond. They typically take a small piece of equity in exchange for a small amount of cash and entry into the program.

As part of our Midas List coverage this year, FORBES created a list of the top U.S. incubators and accelerators. The rankings (see the chart below) are based on a number of factors, focusing on the value of the incubators’ companies. In other words, we took the exit prices or the last priced equity valuation of the companies that have gone through each program. We also took into account other measures, such as how much venture funding their companies have raised, what percentage of their companies have raised funding and what percentage of their companies have been acquired or gone out of business. (Note: some firms provided us data for the rankings on condition that we not publish it.) The Midas List, which ranks the top 100 venture capitalists in the world, launched Wednesday, May 2.

The top incubator in our analysis is Y Combinator. When taking into account the 172 companies that have been acquired, shut down or raised funding, the total value is $7.78 billion, for an average of $45.2 million per company. It’s a remarkable figure, considering the Mountain View, Calif.-based firm has been in existence for seven years. The data is of course skewed by certain large companies. Y Combinator did not identify individual companies’ valuations in data that they provided, but Dropbox and Airbnb are very large. Still, even if you remove the two, the firm still has a strong hit ratio and number of absolute hits. Some of its biggest exits include: 280 North, Heroku, OMGPOP, Loopt, Cloudkick, Zecter, Wufoo and Reddit. For comparison, last June, Y Combinator said its top 21 companies were worth $4.7 billion.

Y Combinator has a natural perhaps unfair advantage over others because it has been around longer than many others. Therefore, its companies have had more time to grow. Y Combinator has also been popular among investors, judging by the types of deals that are getting done for its companies. For its most recent batch of companies that pitched to investors in March, a select few startups were trying to raise convertible notes at caps of $10 million, $12 million or even $15 million.

Y Combinator established itself by bringing in talented technical founders and encouraging them to build a startup and launch it in three months. (Some already have a product built before starting.) The best way to find out if a product will work is to launch it, Y Combinator Cofounder Paul Graham tells his entrepreneurs. Y Combinator has since expanded, to seven partners.

Sequoia Capital invested in Y Combinator’s funds, and later, Yuri Milner, Ron Conway and Andreessen Horowitz provided $150,000 in guaranteed funding to each startup. The biggest value of the program now, though, may not be the programs, advising or even introductions the firm makes. It’s the network. Y Combinator now has hundreds of founders in its tight network who are known to go to bat for other Y Combinator companies.

The other top firm in our ranking is TechStars. Founded in 2007, the firm is Boulder, Colorado-based, but has expanded nationally, in a kind of franchise model to New York, Seattle, Boston and San Antonio, Texas. A total of 114 companies have gone through the program, and 98 are still active. Of those, 73 are receiving funding and have raised $134 million total in venture capital at last count. The companies have 714 total employees. TechStars is also very popular, with only 1% of 4,000 applications each year to all locations being accepted. About 80% of TechStars companies go on to raise venture capital or a significant angel funding round. Companies have raised an average of $1.1 million upon finishing the program, across all the TechStars locations. About 40% of startups come from areas near the city of each program. TechStars founder David Cohen has hired directors at each of the other locations to run the programs.

“The venture community has started to see high quality accelerators as a filtering mechanism,” Cohen says. “It’s become a new college for entrepreneurs because we’re so selective on front end.”

TechStars’ model is to bring in mentors to help its startups, and has a 10-to-1 mentor to startup ratio to make sure each company gets focused, deep attention from several mentors. TechStars has also tried to disseminate information about its model to others, by creating a “Global Accelerator Network” in partnership with Startup America. By open-sourcing its model, TechStars has helped launch other accelerators. Cohen has also emphasized transparency among incubators. He has published a list of all the companies that have gone through TechStars, including how much funding they’ve raised, and how many employees they have. He’s encouraging others to do the same, so that entrepreneurs can make informed decisions about which program to attend.

“There should be transparency so that you can look at the data and make an informed decision [based on] who was funded and the amount and the success rate,” Cohen says.

TechStars is different because it keeps its incubator batches small and tries to give ample amount of attention to each of its startups, Cohen says. In its last batch in summer 2011, TechStars Boulder had 12 companies. It generally only holds one session per year, whereas others have two sessions. “For us we focus on quality over quantity,” Cohen says. “We want all companies we fund to be successful. We’ve kept our class sizes small.” TechStars also differs from some others in that Cohen also invests in startups, having recently closed a $28 million second fund. Companies that have gone through the program include SendGrid, Occipital, Orbotix, CrowdTwist and OnSwipe.

DreamIt Ventures, founded in 2008, has had 65 companies go through its program. DreamIt has expanded from Philadelphia and now offers a program in New York and one in Israel. DreamIt’s most well-known company is SCVNGR, which last year raised $15 million at a $100 million valuation, according to TechCrunch. DreamIt also recently launched a year-long program for minorities called DreamIt Access backed by Comcast Ventures, which plans to fund 15 companies.

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I would like to add the Triangle Startup Factory to your list. Launched in January of this year, TSF offers a $50k up front investment and a convertible note on the back end that ranges from $20k to $150k.

Housed in the Raleigh-Durham (aka Triangle/RTP) region, TSF is the most highly capitalized technology accelerator in the southeast and is built on a methodology of lean startup principles.

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My friends and I (from Europe) want to build our own tech start-up and we were thinking to start with an accelerator. We came across Plug and Play Tech Center which is also based in Europe. But we are very confused because PnP is not even mentioned in your ranking/article! Is there any reason for this? Because – refering to their website – they seem to be one of the largest and best accelerators in the US!

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I feel that this sort of ranking gives a very inaccurate picture. Value creation as an index favours developed nations where investment is the the measure of value creation. Countries like India have very interesting Grass root ideas that take shape via rural/social incubators such as RTBI (www.rtbi.in) and ICRISAT the agri incubator.